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Rosbank - Focus Russia, How to trade Russia's monetary policy, Jun 10, 2013.

Focus Russia

How to trade Russia's monetary policy

As global markets continue to recalibrate to the idea of higher safe-haven yields, EM rates have suddenly and almost universally fell out of favour. Looking beyond the short-term risks, however, we see some room for differentiation, especially in Russia's case where the CBR is still at the very start of the policy easing cycle. As we pointed out on many

occasions, the current easing cycle in Russia is not only about rate cuts, but at least as much (and we believe even more so) about improving the policy transmission. We provide a brief update on our CBR views with a focus on the implications for local rates. Generally, we believe that these domestic policy factors will help maintain some downward pressure on local rates.

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As regards recent developments on the macro side, economic activity remains stagnant as we progress through Q2 and although headline CPI is temporarily sticky, the outlook is sanguine as underlying inflation looks well anchored. This bodes well for our policy call, while recent rhetoric from the authorities confirms that most of the easing this year comes from measures to improve policy transmission, rather than outright base rate cuts (which are nevertheless also expected). In the FX market, the RUB outperformed most of its peers in May, but is now catching up. We turned neutral on the RUB at the start of March and see little reason to change our cautious stance on the RUB, especially now that risk sentiment towards global emerging markets has deteriorated substantially.

On the local rates side, both IRS and NDF/XCCY rates have been creeping up over the recent weeks on the back of first deteriorating liquidity environment and later sell-off in global rates. We see value receiving at the front end (1y) of FX implieds and IRS curve at current levels as our monetary policy scenario is not priced in.

In the local bond space, the long end of the OFZ curve sold-off aggressively along with the general move across GEM bonds. Tactically, risks related to heavy foreign positioning in OFZ prevail in the short term, but we may ultimately be looking to re-establish longs in the future on signs of stabilisation. We also retain a bullish bias on the corporate bond universe on monetary policy and inflation grounds.

Russian Eurobonds came under severe pressure in May following the broader move across both the safe haven and emerging market bond spaces. Going forward, some consolidation is likely in the short term but Eurobonds remain exposed to the expected weakness in UST in H213.

Finally Russian Equities struggled again relative to global equities last month. Valuation remains attractive, but some caution is needed as Fed exit talks gain traction (we expect the Fed to start to taper QE in September) and commodities remain vulnerable.



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Publication:Russian Banks and Brokers Reports
Geographic Code:4EXRU
Date:Jun 10, 2013
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